How far off is Luceco plc (LSE:LUCE) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Luceco here.

What’s the value?

I’ve used the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I took the analyst consensus estimates of LUCE’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 16.26%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of £43.8M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.

Above is a visual representation of how LUCE’s earnings are expected to move going forward, which should give you an idea of LUCE’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes £65.3M.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £109.1M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £0.68, which, compared to the current share price of £0.816, we find that Luceco is fair value, maybe slightly overvalued and not available at a discount at this time.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For LUCE, I’ve compiled three essential factors you should look at:

• 1. Financial Health: Does LUCE have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

• 2. Future Earnings: How does LUCE’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

• 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of LUCE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!